Should You Do A Rollover From Your IRA To Your HSA?

March 20, 2019

Did you know that if you have money in an IRA that you want to use for healthcare expenses tax-free, you may be able to roll it over to your HSA? As more people realize the power of the health savings account, we are getting more questions about this strategy. Here are the ins and outs of what to consider.

Who qualifies

You are able to do a one-time tax-free rollover from a pre-tax/traditional IRA to an HSA if you meet the following conditions:

  • You are enrolled in a high deductible healthcare plan (HDHP) when you make the transfer and continue to be enrolled in a HDHP until the last day of the 12th month after you make the transfer.
  • You can only contribute up to the maximum HSA contribution for that year. In 2019, that is $3,500 single, $7,000 family and if you are 55 or older a $1,000 catch up.
  • The distribution must be a direct transfer from your IRA custodian to your HSA custodian – it can’t be indirect.

When it makes sense

Some reasons why you would want to do rollover from an IRA to an HSA:

  • Save on taxes in retirement: Withdrawals from a traditional IRA are taxable, even after age 59 ½, and a common thing that retirees spend their IRA money on is for healthcare. If you spend money in an HSA for qualified medical expenses, it is tax free, so doing this transfer can save on taxes in the future for medical expenses.
  • It’s risk-free: After age 65, you are able to spend HSA funds on non-medical expenses if you want. If you do, you would have to pay income tax just like an IRA. In other words, if you roll money from your IRA to HSA then end up NOT needing it for medical expenses, you’ll still have access after age 65. In essence, your HSA becomes like an IRA with a healthcare tax benefit.
  • Good at any age: Many people don’t realize that you only have to be enrolled in a HDHP when you contribute to your HSA, but you can spend that money at any point after, even years later. You are able to spend money that is in an HSA on qualified medical expenses at any age.
  • Lower your RMDs: With a traditional IRA, you’ll be required to start taking a minimum amount out each year once you turn age 70 1/2. For some people that’s not an issue – they need the money anyway. But for people who may be trying to preserve their IRA for later years, rolling some of the money from your IRA to your HSA during your working years can lower the amount you’ll eventually have to withdraw in your 70’s. (keep in mind that once you’re on Medicare, you can no longer contribute to your HSA, so this strategy must be done prior to your enrollment in Medicare, so you have to plan ahead)

When it doesn’t make sense

Some reasons why you wouldn’t want to do this:

  • Your money is in a Roth IRA: If your money is in a Roth IRA and has been for at least 5 years, once you reach age 59 ½, the money that is in your Roth IRA can be used for any expenses without paying income taxes. You have more flexibility with Roth IRA distributions.
  • You’d be missing out on a tax deduction: You get a tax deduction if you contribute to your HSA from non-IRA money. You do not get a tax deduction for a rollover from your IRA to your HSA. If you have the money to max out your HSA with non-IRA dollars, it usually makes more sense to go that route first.

An example of someone who rolled money from their IRA to their HSA

This is a real-world example of when it might make sense to do a rollover from an IRA to an HSA:

  • Someone is 55, recently laid off and working part-time as an Uber/Lyft driver while looking for a new job.
  • A substantial portion of their savings is in IRAs and 401(k)s. Very little is in taxable accounts (individual or joint), meaning there isn’t much money available to spend penalty-free before age 59 1/2.
  • They are making enough income this year to cover their essential expenses but cannot contribute to an HSA.
  • They have an HDHP and anticipate having a HDHP in the future.
  • They think it may take them a year to find another position (the 1 month for every $10,000 of monthly income rule).
  • They think they will eventually use the money ($7,000 + $1,000 catchup) for qualified health expenses.

Like most financial decisions, your individual situation determines whether it makes sense to do a rollover from your IRA to your HSA, but in the right situation it can be a really great idea.